When governments cover economic loss with taxpayer dollars, insurers are missing out in potential premiums through a simple redefinition of catastrophic loss coverage.
“If you look around the world, only about 25 per cent of catastrophic loss is actually insured. The other 75 per cent, that they refer to as economic loss, is really by definition a loss that is not covered by insurance,” says Philip Cook, the CEO of Omega Insurance Holdings. “So someone is picking up the cost, that 75 per cent, and that someone is obviously governments and eventually taxpayers.”
Everyone faces a catastrophic exposure of some sort or another, Cook told Insurance Business, but if everyone was offered the opportunity to buy catastrophic cover at the primary level, regardless of the catastrophe, then you would dramatically expand the population that is contributing.
And currently, the government is doing just that – so to speak.
“The government has the benefit of being able to charge a premium to everybody, every taxpayer,” Cook told Insurance Business. “It is sort of compulsory insurance to everybody.”
Cook didn’t realize he was opening a Pandora’s Box when he spoke at the recent CIP Society Industry Trends breakfast at the National Club in Toronto. (continued.)
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“Insurers for years have been able to place catastrophic reinsurance protection without naming the catastrophe,” he says. “We’ve come up with all sorts of definitions in terms of time, area, types of loss – but we haven’t been that specific in saying it is ice storm, earthquake – if it is covered by the insurer, it is covered by the reinsurer as a catastrophe.”
His suggestion to insurers gathered for the breakfast was to change selling coverage on a specific name basis to approaching catastrophic loss at the policyholder level as an actual peril, as opposed to an outcome.
“Since I did the presentation, I’ve been inundated by people asking me if there is something I can put together – and I am thinking of doing that,” says Cook. “It was really an out-of-the-box suggestion that I threw out there that companies should consider. I’ve had a conversation with IBC (
Insurance Bureau of Canada) and a couple of other groups suggesting that is something we should think about.
“I think I will put together a more detailed outline of sorts to get the debate going.”
As for who should be driving the debate on changing the definition of catastrophic loss, Cook feels it needs to be a joint effort.
“It needs to be both (government and insurers). It is one thing to offer it, catastrophic cover; it is another for the public to take it up,” he says.
Cook says that government has a role to indicate to people who live in flood plain or earthquake areas that support for catastrophes won’t be there if insurance is available, explaining that government will only contribute above the insurance coverage. (continued.)
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Expanding the definition of CAT cover would have benefitted those in the Greater Toronto Area who were left without electricity for days during the Christmas holidays, Cook points out.
“Our policies only picked up food spoilage if there was actually direct damage to the building if insured. They only picked up additional living expenses if there was physical damage to the building,” he says. “The fact that people were freezing to death and were forced to live in a motel for four or five days until the power came back on; unless there was damage to the property, they weren’t covered.
“My idea here, eventually, if the clients were buying catastrophic cover, that would meet the classes of catastrophe,” says Cook. “They would have coverage for things that aren’t covered now.”
